Partial sale of a partnership interest: flexibility in controlling gain?

• Author: Packard, Pamela

A sale of a partial partnership interest and an allocation of adjusted basis between the interest sold and the interest retained is rather complicated, particularly in situations involving the discharge of partnership liabilities. The IRS issued Rev. Rul. 84-53 to clarify this issue, based, in part, on the Sec. 752 regulations then in effect. However, the subsequent issuance of final Sec. 752 regulations may result in substantially different allocations of nonrecourse debt (and basis) than occurred under the previous Sec. 752 regulations and Sec. 1001 rules used in formulating Rev. Rul. 84-53. Therefore, it is difficult to predict how Rev. Rul. 84-53 applies in certain circumstances.

General Rule of Rev. Rul. 84-53

Under Rev. Rul. 84-53, a partner has a single basis in his partnership interest. When calculating basis if he sells only a portion of his partnership interest, the partner first excludes from the adjusted basis of his entire interest an amount equal to his share of all partnership liabilities. Next, he allocates part of the remaining adjusted basis (the residual basis) to the portion of the interest sold based on the ratio of the fair market value (FMV) of the portion sold to the entire interest's FMV. Finally, he adds the amount of residual basis allocated to the interest sold to the amount of his share of liabilities considered discharged on the disposition of the transferred interest. The result represents the basis in the portion of the interest sold.

Special Rule

The general rule does not apply when the partner's share of partnership liabilities exceeds the total adjusted basis in his interest (e.g., when allocated tax losses exceed capital contributions, and cash distributions exceed capital contributions and taxable income inclusions). If the partner's share of partnership debt exceeds his basis in his entire partnership interest (including basis attributable to liabilities), the basis of the portion sold would bear the same relationship to his entire basis that his share of partnership debt discharged on the sale bears to his total share of partnership debt.

Example 1: A is a 50% general partner in AB Partnership and also owns a 25% limited interest. A's basis in his combined interest is $90, which includes $96 of recourse partnership liabilities allocated to him as a general partner under Sec. 752. A sells half of his general-partner interest to C for $6. In calculating his gain or loss on the sale, A uses Rev. Rul...